IPOs: STO Delivers in Shenzhen, Wumart Checks out of HK

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Bottom line: STO’s backdoor listing and Wumart’s pending de-listing reflect the rise in China of e-commerce, which is boosting delivery companies like STO and undermining traditional retailers like Wumart.

STO delivers back-door IPO

A couple of listing stories are shining a spotlight on China’s rapidly changing retail landscape, which is seeing consumers migrate en masse to e-commerce from traditional shops. The e-commerce boom has fueled a parallel explosion in demand for delivery services, and now one of the largest private couriers, STO, is getting set to make a backdoor listing. On the other side of the shopping aisle are struggling traditional retailers like Wumart (HKEx: 1025), which is reportedly getting ready to abandon its longtime Hong Kong listing through a privatization bid.

This pair of stories also reflects a few other emerging trends for publicly traded Chinese companies, including a growing preference for domestic listings compared with an earlier one for offshore IPOs in places like Hong Kong, New York and Singapore. Shenzhen in particular is fast emerging as a hot spot for high-growth companies to list, thanks to rapid growth in the 5-year-old Nasdaq-style ChiNext board. That trend is likely to continue with plans for a similar board in Shanghai, which could reportedly launch as soon as next year.

The STO deal also represents a nascent new wave of backdoor listings, which are already quite common in New York and Hong Kong but still relatively rare in China. We’ve recently seen former New York-listed advertising firm Focus Media and online game company Giant Interactive pursue such listings using existing publicly traded companies as shells. Now delivery giant STO looks set to become the next in this trend.

According to new reports, STO has selected a Shenzhen-listed company called IDC (Shenzhen: 002468) as its backdoor listing vehicle. (Chinese article) IDC revealed the plan in a separate stock exchange filing. The plan looks quite typical, and will see IDC issue a massive amount of new shares and give them to STO, which will then inject most of its assets into IDC and probably change the company’s name.

The listing would make STO the first privately owned Chinese parcel delivery company to list. I’m not sure why it’s choosing a backdoor listing over a formal IPO, as the company is well known and would be a good candidate for listing on the ChiNext or even perhaps one of the main boards in Shanghai or Shenzhen. STO previously revealed it was on track to post 10 billion yuan ($1.6 billion) in revenue this year.

Cut-Throat Competition

I suspect STO’s financials probably aren’t that attractive, since competition is notoriously cut-throat and margins very thin in the delivery business. China’s securities regulator has also suspended all new listings over the last few months during a big correction on China’s stock markets. But the situation seems to be stabilizing, and it’s quite likely new listings could resume next year if the markets remain calm.

Next let’s look at Wumart, which was once a big name on China’s retailing scene when chain stores began to emerge in the 1990s. I always wondered why the company was never sued by Wal-Mart (NYSE: WMT), since its English name was strikingly similar to the US retailing giant. But names aside, Wumart is a company that’s well past its prime and probably should have been de-listed long ago and sold to a better-run operator.

The reports say Wumart shareholders will get a big premium for their stock, and the buyout will allow the company to make its next move out of the public spotlight. (Chinese article) Wumart was a pioneer when it built up its name in the 1990s, but unfortunately its shops still look like they’re stuck in that era. I suspect this privatization is being funded by an e-commerce company or other retailer that is interested in acquiring Wumart ,and will aim to overhaul and revive its aging stores after this de-listing is complete.

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